These excerpts clearly show that the records that are supposed to be accurate and have been used to set phone rates as well as account for tax payments, are filled with improper, if not downright fraudulent entries — thousands upon thousands of entries.

What’s worse is that the FCC Audits which attempted to match these records to existing network equipment found that:

• Type 1 — 5% of the equipment was “Non-Existent — Couldn’t be found
• Type 2 — 5% of the equipment could not be verified — Couldn’t be found
• Type 3 —12% of the records in this phone-equipment inventory did not describe ‘physical’ equipment/
• Type 4 — Erroneous Valuations — One of the startling problems with these records is the shear volume of things that don’t add up – from items with “0” or negative quantities, items that have a 100,000% difference in the cost listed, or cost factors off by 1,000,000 or more.

From the customer perspective this means that the information supplied to the FCC and state commissions was not only sloppy but fraudulent.

FACT ONE —- Aren’t Companies Required By Numerous Laws To Have Accurate Accounting Books? Yes. According to the New York State Public Service Commissions Audit of Verizon New York’s Accounting, accurate reporting is “fundamental”. (Review of the Federal Communications Commission’s Staff Report of the Audit of the Continuing Property Records of New York Telephone Company * Redacted version *August 8, 2001, CASE 00-C-0788 – Proceeding on Motion of the Commission to Investigate the Accounting Practices of New York Telephone Company Concerning its Telephone Plant in Service)

“The accurate reporting and accounting for plant costs is fundamental to rate setting, and telecommunications is a capital-intensive activity supported by a considerable investment in network plant. The costs associated with return of capital (depreciation) and return on capital (interest and equity return) can account for approximately one-third of a company’s revenue requirement.”

Verizon and the other Bell companies must show location, dollar amount and have supplemental information including an accounting trail.

“The USOA (Uniform System of Accounts) requires that New York Telephone to maintain a continuing property record system (CPR). The CPR identifies individual equipment items (and related dollar amounts) that comprise the company’s telephone plant in service (TPIS) balance. It also records their location and along with supplemental records provides an accounting trail to their cost support.7 The CPR effectively acts as a perpetual plant inventory and substantiating the TPIS balance. The CPR should provide the information necessary to readily verify the physical existence of plant items whose cost is reflected in the TPIS balance. For this reason, the CPR needs to be reasonably accurate and its total cost for plant items should equal the financial statement plant balance.”

Unfortunately, the state commission has removed this report from their own web site. You can find a copy at http://newnetworks.com/NYplantdoc10309.pdf

FACT TWO – Do These Records Directly Affect ALL Phone Rates, Both Residential And Business Customers, As Well As Competitive Services. Yes.

The Bell companies would like everyone to believe that phone rates have nothing to do with the actual costs of offering local phone services. Unfortunately, this is simply a lie.

First, for over 100 years, phone rates were set by the state commissions using a formula called the “Rate-of-Return”, where the costs of equipment, staff, as well as other costs were examined to determine the companies’ profits. Since wireline local phone service is still controlled by monopolies, who are also utilities, these companies were regulated because their phone rates are supposed to be “fair and reasonable”.

Starting in the 1980’s, there was something called “Deregulation”, where companies were given new regulations called “Price Caps” or “Alternate Regulation”. These regulations established the setting of the price of service, but did not examine the profits for many of the phone services. (each state has different laws).

However, even under price caps, the starting point of all phone services set based on the costs of the equipment, staff etc. If these prices were fraudulently set, which these excerpts reveal to be the case, then the original price cap models have also been inflated.

The Bells also argue that they have 4 different sets of books and therefore, while there may be a problem in the CSR, this doesn’t impact rates. Teletruth is not the only group that has examined this issue and found that these books affect rates. The General Services Administration stated: (General Service Administrations’ Comments April 17, 2000, CC docket 99-117)

” The CPR audits indicate that the ILEC (bell) gross plant investment is overstated on both their regulatory as well as financial books. The Commission must ensure that this situation is corrected.”

FACT THREE — How Are Phone Prices And Profits Inflated?

The problems with inflated statements of equipment started in the 1980’s, when executives who were dividing up the assets for the break up of AT&T’s local phone companies into seven new “Regional Bell companies”, realized that the books showed more equipment than there was in the networks. Therefore, prices then and now are inflated because the Bell companies inflated their own equipment budgets with ‘Vaporware”, missing or unverifiable equipment over the last two decades.

Under the revenue minus expenses equals profits model, If you increase the expenses, then the original prices were based on inflated expenses and therefore raised rates. Conversely, if the missing equipment is deducted, the expenses would have been lower and therefore the rate should be lowered. (this model is simplistic compared to any full rate case, but the principle is the same.)

Therefore, every customer has overpaid, and we estimate it to be approximately $600 per phoneline for their local phone services, as well as all other services that use the local phone networks.

It should also be noted each Bell companies’ audits showed equally illegal acts. Also, these audits only represented ¼ of the potential audit areas to be examined. Thus all problems should be multiplied by 4.

FACT FOUR: Does This Missing Equipment Affect Every Phone Rate, as Well as All Calling Features or the Taxes and Surcharges.. Yes and There’s a Multiplier Effect.

The primary source of the costs of every part of the service starts with the equipment in the network, and so if one part is priced too high, there is a multiplier effect because everything else is not only priced to high but also doubly taxed.

Take the FCC Line Charge, which does not go to the FCC but is revenue to the local phone companies. This rate is set by the FCC and the starting point was based on a partial cost of the network for long distance services. (The FCC has since changed the definition to something more vague.)

If the beginning point was overpriced, then this charge is over priced. But what is doubly troubling is that this surcharge is also the basis for taxes and surcharges on the phonebill as well, so the customer is being doubly screwed with a higher rate and higher taxes and surcharges imposed on that rate.

It also afftects the Universal Service charge collection in numerous ways. For example, this fund is supposed to be used to pay for schools and libraries, but also gives money into a “high-cost” fund, which suppliments phone costs in high-cost regions.

This surcharge is applied to the costs of long distance and local service and so, if those other items have been inflated so is this charge,

Next, when a school or library uses this fund they are paying a discount, but ir is against the “Business Retail” prices — which have been inflated by the extra costs based on the missing equipment — so everyone gets less service and pays more. But it gets worse when you realize that the Bell companies are the largest recipient of the Unviersal Service Fund for vendors — in the Schools and library funds the Bells as a group made over 1/2 billion dollars, more than any other group or vendor.

And finally, the Unviersal Service fund is taxed and surcharged state and local taxes in New York and other states, so if this charge is inflated, so are the taxes being charged.

In the case of Calling Features, from Call Waiting to Caller ID, ratepayers paid for the development and implementation of this based on additions to the network, starting in the 1980’s and if that equipment was never put in or is based on the missing equipment, then the prices for those services are also inflated, not to mention the taxes and surcharges applied to these services.

FACT FIVE — Does this Affect Competitor Rates? Yes.

There is currently a debate throughout the US over the discounted prices to be set for competitors to use the networks and right now each state sets its own rates. These rates are called “TELRIC”, and are based on a series of complicated formulas, that are tied to the previous rates and costs in various ways, but have their own methodology.

But the current situation is a mess. In some cases, such as New Jersey, the prices have been set that the local phone company, Verizon, is suing over, stating that these prices are “too Low” and below costs. Meanwhile, in other states, such as Illinois, the Bell company, SBC, was able to sweet-talk the state legislature to override the state commissions authority to set competitor rates, requesting that rates be set based on the Bells’ historical costs.

In every case however, the primary issue is still a open gap – what does local phone service really cost, and this question must include the equipment in the networks.

FACT SIX – Alternate Regulation And Price Caps Are Also In Question.

What makes this current situation even more appalling has been the current issues dealing with the prices and profits under these newer “Alternate Regulations”. In many states, the Bells were granted new financial incentives based on their promises to rewire the state with a fiber-optic wire. Teletruth as a filed Complaint in Pennsylvania. In that state, Verizon, PA promised to have 50% of the state rewired by 2004 with a fiber-optic wire that can deliver a 45mps service in both directions to rural, urban and suburban customers. We estimate that the Alternate Regulation has cost customers $785 for a network service they will never get. Many states, including California, Texas, Ohio, Illinois, Indiana, New Jersey, and Massachusetts, had similar promises made in exchange for regulatory freedoms – read more profits.

The way that Alternate Regulations make companies more money is simple. If you cap the price of a service, but the costs of the networks keeps going down, then the company continues to make more profits.

FACT SEVEN — Does the Missing Equipment Affect Tax Payments by the Bell Companies? Yes.

Anyone who has ever been through an IRS audit knows that these books would never pass muster. Whole classes of equipment, such as undetailed investment, would immediately be stricken from the books. The IRS currently requires documentation from small businesses for anything over $25, and even then you must have a full diary answering the who-what-where and when.

In this case, New Networks Institute has filed with the IRS on this topic because the Bell companies have been taking deductions on equipment that does not exist or is not properly identified. We believe that both the states as well as the federal government are owed billions in tax revenues from this missing equipment.

Fact EIGHT — What Exactly Are The Accounting Problems — Many.

It’s hard to believe the size and scope of this cover-up. The actual records shows bogus items, such as accounts marked “Dummy” for $2.1 million dollars or “Dummy for Betsy, for $838, pages of accounts marked simply “************”, and even “Specials for Annuals” which refer to the company simply adding millions of dollars of non-equipment into the accounting books.

Here’s Specifics About the Verizon Excerpts.

• Page 1 — Undetailed Investment shows 45 examples – over $60 million dollars, of a category called “Undetailed investment” This is of course illegal as it has no equipment description, no location, just the money in the accounting book. —Thus, there is NO paper trail to make sure that the equipment ever existed.

According to the FCC audit there was $360 million dollars, representing 48,000 records with no details provided.

• Page 2 — Unallocated Other Costs. Also showing 45 examples, this is simply another form of bogus entries into the accounting books. Once again there is NO paper trail to make sure that the equipment ever existed.

According to the FCC, “Unallocated Other Costs ” had 56.000 entries into the books that constituted $414 million dollars.

• Page 3 — “Dummy” “Dummy for Betsy” Probably the most amusing finds was that there were accounts labeled as “Dummy”, with one account logging in at $2.1 million. “Dummy For Betsy” was $836.10.
• Page 4 — “Specials for Annuals”. At the end of various years, 1987, 1989, 1990 and 1992, Verizon added undetailed, unallocated, “specials” at $1.3 –$2.3 million dollars. Since these are NOT equipment, or have any data attached to them, they should not have been put in the equipment inventory records, or they should have identified their equipment type, location, etc.
• Page 5 No Decryption: Blank. “**************” What can you say about equipment inventory records that have absolutely no details by a line. Considering this is a full page of unidentified items which range from 0.00 to a half of million dollars, none of these entries are legal.
• Page 6 — “Used for Retirement” — Here’s a $65 million dollar line item with no description. Was it used in setting rates?
• Page 6 — “ADJ to NTWK –— Here’s another $2.9 million dollar line item with no data.
• Page 7 –—************* Just to show the commonness of the problem, here’s another line used in place of a $561,000 item.
• Page 8 –— “Capitalized RTUI” — This is a $122 million dollar line item which is detailed “Capitalized Right to Use” software. Software is not usually part of an equipment inventory, or when it is, it should have more details than simply the name.
• Page 8 –- 0 or Negative Quantities. On this page, the quantity of the equipment is missing so you don’t know if it represents one of more pieces of equipment. It also shows an entry, such as 999991 for “New York” at $19,568.12 with no quantity or description.
• Page 9-10 —Wide Range Unit Cost —-The LU Mod 3 – How Much Does This Item Cost? When one talks about whether these accounting books are at all accurate, the reader needs to read these two pages to know that something is truly amiss. This device has a per-unit cost of between $4.34 cents to $134,000 dollars. This item is usually priced at $5,000, and so, it is clear that sometimes Verizon simply made up numbers and put them in these records instead of actually cross-referencing the items for any sanity check.
• Page 11 — Inconsistent Material and In-place Costs. The right band column of this excerpt shows a “factor, which is supposed to represent the overhead rate of running the equipment – and it should be at approximately 1.5 factor.

FACT EIGHT — Has Any Other Government Agency Corroborated The FCC’s Audit Findings? Yes. The New York State Public Service Commission released a staff report in 2001 which found that most of the FCC’s findings were correct.

“After reviewing the FCC plant audit workpapers and the company’s responses, we concluded that NYT could not readily locate for physical verification the non-specific plant investment requested by the FCC staff. NYT was also unable to track the cost of the plant item back through its information systems and transaction files to its associated work order. It also could not provide an accurate breakdown of construction costs nor provide related source documents.

• “We agree with the FCC staff that NYT’s CPR does not provide the essential details for the non-specific investment. Specifically, the non-specific investment lacks fundamental pieces of information, which would allow verification of recorded amounts and management to exercise control over the investment:“As a result of this missing detail, a link cannot be made between the amount on the books and an item of physical plant in service. Without such details, the physical existence of these assets cannot be verified, nor can an item’s value on the books be traced to the supporting documents (e.g., work orders, invoices).”

FACT TEN — Did The Verizon Accounting Firm Know There Were Problems With The Books? Yes. In the case of the New York Audit, Price Waterhouse knew that the “undetailed investment” items were excluded from the periodic verification procedures.

“By excluding these assets from periodic verification over many years, NYT may have weakened its controls in a manner at odds with the basic operating standards required of all businesses. The company’s independent accountant, PWC, was aware of this exclusion.“

Conclusions:

Anyone reading these details should realize that this is only the tip of a very large iceberg and that there are serious violations of many accounting laws, effecting both local phone rates as well as missing tax payments to the US Treasury.

From the customer perspective, imagine that your phone rates were set with these statistics — don’t you want an investigation by the various agencies? .

Teletruth has filed a FOIA to open the Books and let every government agency investigate these issues and get refunds for customers.

To read more about or how to get involved see: http://www.teletruth.org/audit.html